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The Third Choir

The Choir
Despite what the academics and semantics present, we remain firmly in the tapering is tighteningcamp. Furthermore, while it's not an apples-to-apples structural comparison (becauseof ZIRP and QE) to previous Fed cycles, we would argue that the esoteric natureof our current monetary policies introduces a greater behavioral catalyst forthe markets to react and interpret; thus, a longer lag-time between what theFed says and eventually does. Are they still exceptionally accommodative? Youbet, but they have been trying to prepare the markets throughout the year thatthey are approaching a major pivot. In terms of where the rubber meets the roadin the market, the bond market voted unanimously this spring that even a mentionand discussion by the Fed of the taper was equivalent to tighteningthese days.

With the Chairman's last meeting on deck tomorrow, we feel it's a toss-up between a ceremonial introduction of a taper or a more definitive timetable to when the Fed will begin curtailing QE. From our perspective, it's mostly a moot point - because we feel the bond market has already accomplished the lion's share of heavy lifting with higher rates this spring and summer.

With respect to the US dollar, we continue to expect that the USDX will make another push towards the bottom of its long-term range. At the end of the Fed's previous accommodative cycles (1977, 1994 and 2004) - the dollar has initially come under pressure and tested the bottom of the range. Our comparative profiles of the USDX have been pointing that way since June.

USDX 10 Yr Yields Fed Funds Rate 1973-Today (Monthly)
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The one constant you can depend on is that participants will overreact when the US dollar weakens. Point being, they egregiously misread the tea-leaves to indicate hyperinflation on the two previous occasions (08' & 11') when the dollar tested the lower limits of its long-term range. With the quantitative reservoir now almost full and reaching the Fed's flood gates - we expect to hear a very loud and boisterous third choir as the dollar doubles back.

Last year at this time we had looked at the 1980 top in gold as a prospective guide for both the current market and the US dollar. Gold did loosely follow those historic break-lines well into the spring, but a notable negative divergence was recognized in the dollar which led us to temper our downside expectations with precious metals in June and pivot bearish on the US dollar. While gold has made a round trip back towards its June lows, we feel it's only a matter of time before the market is inspired to its feet by members of the third choir and hymns from 1977.

Lovely.

USDX vs Gold vs  Fed Funds Rate 1973-Today (Monthly)
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Euro vs US Dollar Index (Monthly)
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USDX 1994 vs USDX 2013 (Weekly)
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USDX 1994 vs USDX 2013 (Daily)
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